General

Enough Already! Funding Circle Deserves to Keep Their 7(a) Lending License

I have been following Funding Circle U.S. since they began life as Endurance Lending all the way back in 2012. You can read my 2013 piece here about the acquisition of Endurance, which kicked off Funding Circle’s presence in this country.

I have watched the company develop into one of the leading fintech lenders for small businesses. Over the years, I have done podcast interviews with several Funding Circle leaders (see here, here, here, and here) and have written or edited dozens of articles about the company.

My point is that I am not a casual observer of what Funding Circle has done or is doing now. And seeing their name dragged through the mud by uninformed lawmakers in Washington makes me mad.

The SBA adds new lenders to the 7(a) program for the first time in 40 years

First, some backstory is probably needed. The Small Business Administration (SBA) has this very popular small business lending program called the 7(a) Loan Program. For most small businesses, this is the least expensive form of credit they can obtain because the bank (it is almost always a bank or credit union) is not taking on much of the risk, the federal government is.

Depending on the size, the SBA guarantees either 75% or 85% of the loan. In the 2023 fiscal year, the SBA backed 57,000 7(a) loans totaling $27.5 billion. This is a significant program that helps small businesses a great deal. Almost all of these 57,000 businesses would have had to pay much more for their loans but for the SBA guarantee.

Funding Circle has wanted to become an authorized SBA lender for many years and has been actively working on this since 2019. So when the SBA indicated that they would be adding new licenses for the first time in 40 years, Funding Circle was excited to apply. Then, in November, we learned that the SBA had approved three new licenses, including one to Funding Circle.

Right away there were some who were not happy with the SBA. But in recent weeks, this has turned from unhappiness to outright hostility.

The trouble started in earnest when, on an earnings call, Funding Circle Group CEO Lisa Jacobs announced that the UK-based company is considering selling its U.S. operations. There are multiple valid business reasons for this. Regardless, this would have no impact on the company’s ability to make SBA loans, something it has been preparing for for many months. Any sale would likely help scale the company’s plans here more quickly.

Searching for a reason to disqualify Funding Circle

But that wasn’t good enough for Senator Joni Ernst (R-IA), ranking member of the Senate Committee on Small Business and Entrepreneurship. She blasted the SBA and Funding Circle, saying they were using the 7(a) license as a bargaining chip to sell the company.

Then there was the crazy story that Funding Circle is somehow affiliated with the Chinese government. They did receive an equity investment from a private Chinese investment fund as part of a 2017 funding round, but by 2021, that money had been divested. Thankfully, that argument was quickly dissipated as it was easily proven false.

Then they attacked the current head of Funding Circle, Steve Allocca, because he was at Bluevine, a company that experienced PPP fraud. Never mind that he was hired at Bluevine in February 2021, three months before the program ended. But that is just an inconvenient detail.

Another line of attack has been that the SBA should not be handing out licenses to an unprofitable fintech. Now, Funding Circle is publicly traded on the London Stock Exchange, so we have complete transparency into its financials. We know that in 2023, the company made a small loss that was in line with expectations and that it had £170 million in cash on its balance sheet as of December.

It is possible that Senator Ernst does not understand how businesses work because to call a company with around $200 million in cash on its balance sheet and a $5 million annual loss in 2023, as one that is in a “weak financial position” is a bit of a stretch (not to mention that Funding Circle made a profit in 2022).

The sale will be a positive for U.S. small businesses

Back to the sale of Funding Circle’s U.S. business. Being a marketplace lender, Funding Circle did not hold any loans on its own balance sheet. A large group of outside investors, including many banks, fund these loans. However, the rules for an SBA lender mandate that 10-25% of the loan volume must be kept on the balance sheet. This changes the model for Funding Circle to a much more capital-intensive business.

So, the Funding Circle board decided that for the U.S. business to reach its full potential with its new SBA license, it would explore a sale. Now, as I understand it, talks are still in the early stages, and no sale is imminent, but the company is adamant that this will be a positive for U.S. small businesses. I agree with them.

Funding Circle has an opportunity to become the #1 SBA lender for sub $500,000 loans, the segment of the market they have specialized in for more than a decade.

To their credit, the SBA is standing firm, at least for now, saying that the SBA “looks forward to working with them [the newly approved SBA lenders] and all lenders to help small businesses access the resources they need to thrive.”

However, we have likely not seen the end of the political posturing and criticism of Funding Circle. There is an upcoming House Small Business Committee hearing, where the Funding Circle SBA license is expected to be part of the discussion.

If you believe that the traditional banking system has done everything it can to help small businesses obtain access to capital, then sure, let’s keep the status quo. But we know that for most small businesses, particularly the very small businesses looking for sub $500,000 loans, fintech has provided the vast majority of the supply in the past decade.

Funding Circle has been one of the industry leaders here and, with its new 7(a) license, is poised to reach a new level. Let’s hope Congress comes to its senses and doesn’t stand in the way. If they do, it will be the small businesses that suffer.

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